The Federal Reserve should happy with the lack of volatility in the U.S. dollar. Many arguments can be made for why central bankers want a weaker or stronger currency but at the end of the day, what they really prefer is a stable currency especially when they are in the middle of dramatic changes to monetary policy. The whole point of forward guidance is to give the market a frame of reference and to limit the volatility in the financial markets. So while traders may not be happy with the consolidation in G10 currencies, the Federal Reserve will be very satisfied with the decline in volatility. There was very little consistency in the dollar’s performance today which held steady versus the euro, strengthened against the Japanese Yen, Swiss Franc, New Zealand and Canadian dollars and weakened versus the British pound and Australian dollar.

None of today’s event risks had much impact on the greenback. The dollar dipped modestly after weaker housing starts and building permits but recovered quickly. Janet Yellen had nothing new to say about the economy and monetary policy. She promised to provide continued accommodation to support the recovery and indicated that while the greater risk is for inflation to undershoot their goals, they do not rule out an unexpected increase in inflation. The labor market is still growing slower than they would like but she did not mention the need to slow their pace of tapering. In fact, Yellen stressed that the change in guidance does not mean policy plans have been altered. She also did not mention when rates would increase. As for the Beige Book, increased growth was seen in most regions with 8 out of 12 Fed districts reporting “modest or moderate” growth. With the weather improving, consumer spending and port volumes and trucking increased. Labor market conditions were mixed but generally positive and while the upbeat tone helped stocks, it had very little impact on the dollar.

CAD Sinks After BoC Lowers Growth Forecasts

With a busy economic calendar, commodity currencies were on the move today. The Canadian dollar traded sharply higher after the Bank of Canada’s monetary policy meeting. Despite improvements in labor, trade and housing since the last meeting the BoC lowered its 2014 GDP forecast to 2.3% from 2.5%. They attribute this move to concerns about the export sector and investment. While the central bank also said that total inflation this year is higher than forecast, they continue to believe that the “downside risks to inflation remain important.” Uncertainty in Ukraine and credit tightening in China were two risks mentioned specifically in the BoC statement. The overall tone of the statement and Governor Poloz’s speech was dovish with the central bank head saying they can’t shut the door on further rate cuts. Consumer prices are scheduled for release tomorrow and given the BoC’s observation that inflation is higher than forecast, we believe CPI could surprise to the upside, limiting the rally in USD/CAD. Meanwhile in New Zealand the smaller than expected increase in CPI kicked off the slide in NZD. The sell-off gained momentum after Fonterra reported another weak milk auction that saw a decrease in demand and prices. Considering that milk represents 30% of the country’s merchandise exports, the 20% drop in milk prices over the past 2 months could force the Reserve Bank to slow its plans for tightening. The central bank meets next week and while they are still expected to ease, they could say that future tightening is data dependent. Finally the Australian dollar received a lift from slightly better than expected Chinese GDP and retail sales figures. Industrial production weakened slightly but the decline was offset by the other releases. Australian business confidence and New Zealand consumer confidence figures are scheduled for release this evening.

GBP: Strong Labor Data Drives Sterling Back to 4 Year Highs

Thanks to stronger than expected housing data, GBP/USD is poised for another test of its 4 year high versus of 1.6822. The last time sterling attempted to break through this level, the rally fizzled 2 pips shy of the high and today, it stalled 4 pips below its former high. Not only does this suggests that there are a significant amount of stops near 1.6822 but there could also be option barriers. We think it is only a matter of time before GBP/USD breaks above 1.6822 and when it does, given the resistance, the breakout should be very strong. Our colleague Boris Schlossberg provided a very thorough assessment of this morning’s U.K. employment report. “UK wage growth rose above the rate of inflation for the first time in 5 years sending cable soaring through the 1.6800 figure as unemployment dipped below the psychologically key 7% mark. Average earnings index rose by 1.7%, which was better than the 1.5% rate of inflation, allowing workers to outpace the cost of living expenses for the first time since 2009. Claimant count came in line at -30K and the unemployment rate dropped to 6.9% from 7.2% the month prior. Although the BoE has expressed reservations regarding the strength of the pound, the central is unlikely to aggressively jawbone the currency lower – especially if it does not seriously affect growth going forward – as it provides a natural anchor for inflationary pressures.”

Eurozone Current Account Balance Remains Near Record Levels

For the second day in a row, the euro ended the North American trading session unchanged against the U.S. dollar. Although U.S. yields inched higher, the increase was small compared to recent losses and provided barely any support to the greenback. At the same time, euro shrugged off mixed economic data. Consumer prices in the Eurozone grew 0.9% in the month of February, which was slightly less than the market’s 1.0% forecast but still 3 times stronger than the 0.3% rise the previous month. For the ECB, this report will ease some concerns about low inflation. The same underlying strength can also be seen in the region’s current account surplus, which dropped to 21.9B from 25.4B but remained near a record high. So while both pieces of data either fell short of expectations or declined, their lofty levels has prevented euro from falling. One of the main arguments for euro strength has been the region’s record current account surplus and for the time being, it continues to lend support to the currency. German producer prices are scheduled for release tomorrow and price pressures are expected to stagnate for the second month in a row.

USD/JPY Gains Led by Rally in Nikkei

A bottom in the Nikkei overnight gave investors hope that a bottom could also be forming in USD/JPY. The currency pair broke out of a 5-day long consolidation that lifted all of the Yen crosses. USD/JPY has a very strong correlation with U.S. yields and the Japanese stock market and when there is a strong movement in either one of these assets, the currency pair will respond. Aside from gains in U.S. equities, shares of Softbank surged on the back of strong earnings from its Chinese affiliate Alibaba. Finance Minister Aso also said, “the GPIF could move sometime in or after June, once those movements are clear there is a high chance that foreign investors will react.” In other words, in about 2 months, the Government’s Pension Investment Fund, which is also the world’s largest pool of retirement savings will become much more active in domestic equities and their demand could boost foreign investment. Having such a large player increase its exposure to Japanese stocks is extremely positive and could be just what the Nikkei needs to offset the drag expected from the consumption tax. The Cabinet is scheduled to release its monthly economic report tomorrow and according to one of Japan’s most widely read papers, they will be downgrading their assessment of the economy.